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A META-ANALYSIS OF THE IMPACT OF PRIVATIZATION ON

FIRM PERFORMANCE

ABSTRACT

Purpose: Despite the vast literature on privatization, the relationship between change of

ownership and performance is not clear. The purpose of the paper is to understand why

we find divergences between the empirical results of papers analyzed.

Design: We apply a meta-analysis to a sample of 60 empirical studies that analyze the

performance of privatized companies. We check whether different results on

performance can be explained by the method of privatization and the level of

development of the country of privatized companies.

Findings: Our findings indicate that companies privatized by public offerings obtain a

better performance than companies privatized using other methods, such as private sale

or voucher privatization, and do not support the common-place assumption that

privatization in developing countries does not improve financial performance.

Originality/value: The study contributes to the literature on privatization because it adds

new empirical evidence about the privatization programs and it first applies a meta-

analysis to a sample about privatization on state owned companies. We discuss

theoretical and managerial implications and offer suggestions for future research on

privatization.

Keywords: Privatization; meta-analysis; performance; state governments

Article Classification: Research paper

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1.- Introduction

The privatization of state-owned enterprises (SOEs) has become a common process all

over the world and was considered a major component of the New Public Management

–NPM–(Broadbent and Guthrie, 1992; Durant and Legge, 2001; Durant and Legge Jr,

2002; Hodge, 2006; Hood, 1991; Lane, 2000; Löffler and Bovaird, 2009; Peters, 1996;

Pollitt and Bouckaert, 2000; Torres and Pina, 2002 among other authors). In the

framework of this doctrine, privatizations are expected to correct inefficiencies

associated with the public sector. Since the beginning of this process, in the eighties,

there have been numerous studies about the privatization policies carried out in different

countries, analyzing their advantages and disadvantages and their impact on the

economy. Although most cross-sectional studies give a considerable advantage to

private ownership, the cumulative evidence is not conclusive (Villalonga, 2000). On

average, there is an improvement in firm performance after privatization, but the

variance across empirical tests is substantial. Despite the efforts of previous research,

the question remains open.

There are several potentially important theoretical moderators of the privatization–

performance relationship. Given the prominence of privatization as a determinant of

performance differences, the initial evidence suggesting that the empirical evidence is

mixed, and theory suggesting that there are important moderators of this relationship, a

meta-analysis designed to clarify extant evidence seems both timely and warranted.

Therefore, we present a meta-analysis to shed light on how the change of ownership

impacts on the performance of privatized companies. Meta-analysis quantitatively

aggregates prior studies’ empirical findings to detect whether a relationship exists and

to estimate the magnitude of the effect by taking into account study artifacts, such as

sampling and measurement error (Hunter and Schmidt, 1990). Meta- analysis also

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allows investigation of moderators that help explain why results vary systematically

among studies of the same relationships. Although Bel and Fageda (2009) apply meta-

analysis to study privatization in the local sphere, to our knowledge, this methodology

has not so far been applied to the study of the privatization of SOEs. To carry out the

meta-analysis, we select publications that analyze the pre- and post-performance of

privatized companies. Firstly, we carry out the funnel asymmetry test proposed by

Stanley and Doucouliagos (2010) and, secondly, a meta-regression analysis (MRA)

method has been run to determine the effect of the method of privatization and the level

of development of the country on financial performance.

The purpose of the paper is to understand why we find divergences between the

empirical results of papers analyzed. For this, we study whether differences in the

financial performance of privatized companies are explained by two potential

moderators (a) the method of privatization and (b) the level of development of the

country. Overall, our findings indicate that the method of privatization is a determinant

of the performance of privatized companies and results contradict the common-place

assumption that privatization in developing countries does not improve the financial

performance.

The paper is organised as follows. The next section contains the background to the

privatization processes. Section 3 presents a review of the literature on the relationship

between privatization and performance. Section 4 details the method used in the study

and describes the data and variables used in the analysis. Section 5 presents our

empirical results, Section 6 the discussion and Section 7 our conclusions.

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2.- Background

Both nationalization and privatization are the outcome of historical processes.

Government ownership, through nationalization, has been perceived by some authors as

necessary to promote growth. This ownership is higher in countries with low levels of

per capita income, backward financial systems, interventionist and inefficient

governments, and poor protection of property rights (La Porta et al., 2001). Another

reason for nationalization is resentment towards the foreigners who had owned many of

the largest firms in developing countries. Politicians consider that the state should

control strategic economic sectors, such as steel production and defence. However, the

political economy view indicates that governments acquire control of enterprises to

provide employment, subsidies, and other benefits to supporters, who return the favour

in the form of votes1. There is extensive literature about the reasons given by

governments, politicians and national and international institutions to justify

privatization processes. Yarrow (1999) listed the following reasons: enhancing

efficiency by means of the introduction of competition and by obtaining resources in

financial markets; reducing the deficit and the public debt; decreasing trade union

influence; transferring the decision-making process in the markets of goods and services

from the public to the private sector; encouraging a popular capitalism; empowering

employees by selling them company shares; and redistributing social wealth.

Theoretical reasons for contrary findings across studies include the modifications in the

corporate governance system during the privatization process. The OECD (2001)

considers that the privatization of SOEs has been one of the most important channels for

improving corporate governance, which is a key element for enhancing economic

efficiency and investor confidence. Good corporate governance should provide proper 1 For more detail, see the works of La Porta et. al (2001) and Megginson and Netter (2001), among others.

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incentives for the board and management to pursue objectives that are in line with the

interests of the company and of shareholders and should create trust in order to promote

an efficient and transparent market economy. The change of the ownership structure has

required modifications in the mechanisms of corporate governance of privatized

companies. In these companies, governance depends on the effectiveness of relations

between interest groups that control the strategic management and the performance of

the company. Corporate governance has to do with the agency problem and its

fundamental question is how to assure investors that they get a return on their financial

investment. To boost the development of corporate governance and reach this objective,

it is necessary the separation of owners and managers and the expansion of capital

markets, derived from the increase of quoted firms.

With globalization, institutional investors force companies to comply with the rules of

transparency and corporate governance, as institutional investors acquire shares of

companies to maintain shares in the long run (Megginson, 2005). Creating a satisfactory

corporate governance system generally involves changing a nation’s corporate and

securities laws, strengthening the listing and disclosure requirements for its stock

exchanges, enhancing the independence and competence of the national judiciary and

establishing a regulatory regime capable of balancing the competing claims of

managers, outside shareholders, and creditors. The privatization process influences

internal and external mechanisms of CG (Faraci, 2001). Internal governance

mechanisms include ownership concentration, board composition, executive

compensation, top management replacement, the monitoring of executive decisions and

the protection of outside investors. External governance mechanisms refer to the

effectiveness of a market for corporate control that may permit the purchase of the firm

when it is underperforming. Other corporate governance mechanisms are the legal

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system and codes of good governance. The country’s legal system must force managers

to feel the discipline of the capital market (D’Souza et al., 2001; La Porta et al., 2000)2.

Markets affording greater shareholder protection are consistently larger and more

efficient. Codes of good governance are a set of best practice recommendations about

the structure of the boards of directors and act as a substitute for deficiencies in the

protection of shareholders in the legal system (Cuervo, 2002).

In the privatization context, all these mechanisms are very important and the

government should prevent the newly-created shareholders from being expropriated by

the managers of privatized companies (Bortolotti et al., 2003). Where the law affords

weak protection to shareholders, governments are more reluctant to relinquish control of

SOEs to avoid opportunist behavior on the part of privatized firms and privatization

efficiency is lower. Dharwadkar et al. (2000) argue that weak governance and a limited

protection of minority shareholders intensify traditional principal-agent problems3.

Therefore, post privatization performance improves when corporate structures are

introduced into the companies.

In developing countries, the relationship between privatization and corporate

governance has been analyzed by Boubakri et al. (2004, 2005, 2008) , among others.

These authors find that the change of ownership induces modifications in the corporate

governance of firms and improves performance. The biggest improvements in

performance are associated with developed stock markets and where laws protect

shareholder rights. Nestor and Mahboobi (2000) assert that better incentives systems

and governance mechanisms produce higher efficiency in privatized companies. If

2 La Porta et al. (2000) note that the protection of shareholders’ legal rights varies significantly across countries. Shareholders in countries with an English common law tradition benefit from much stronger legal protection than those living in nations with French civil law systems. 3 These problems have relationship with issues of managerial discretion and expropriation, which occurs when large owners assume control of the firm and deprive minority owners of the right to appropriate returns on their investments.

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companies incorporate a corporate governance system similar to private companies,

they improve their performance whether they are privatized or not. This is because the

SOEs’ system of governance experiences more dysfunctions due to interference from

politicians (Alexandre and Charreaux, 2004). However, Cragg and Dick (1999) assert

that the privatization of companies does not lead to changes in their corporate

governance because the governments transform SOEs into giant bureaucracies.

Although the agency and public choice theories defend that privatization improves the

performance of companies4, many studies do not agree with this assertion5. There is

considerable debate about whether the efficiency and productivity of a SOE depends

more on regulation and competition in the market or on ownership (Ramamurti, 1997;

Vickers and Yarrow, 1988; Vining and Boardman, 1992; Yarrow et al., 1986;

Zohlnhöfer et al., 2008). According to Vickers and Yarrow (1991) and Newbery and

Pollitt (1997), competition is one of the main components of improvements in the

performance of privatized companies. Liberalization, more than privatization, forces

public companies to be more efficient. Empirical studies like Megginson et al. (1994)

and La Porta and Lopez-de-Silanes (1999) assert that there are significant differences

between the performance of companies that operate in competitive and non-competitive

markets. In these studies, it can be observed that all companies improve their

performance after being privatized; but, if the market is competitive, the benefit will be

higher.

4 See Arocena and Oliveros (2012), Boardman et al. (2002), Bortolotti et al. (2002), Boubakri and Cosset (1998), D'souza and Megginson (1999), Eckel et al. (1997), La Porta and Lopez-de-Silanes (1999), Megginson and Sutter (2006), Megginson et al. (1994), Prior and Surroca (2005), Qi et al. (2000), Rodríguez et al. (2007). 5 See Arcas and Bachiller, 2008; Bacchiocchi et al., 2005; Boussofiane et al., 1997; Chen et al., 2007; Frydman et al., 1999; Martin and Parker, 1995; Omran, 2009; Parker and Hartley, 2006; Pejovich, 2005; Villalonga, 2000; Wu, 2006; Bachiller, 2009.

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Figure 1 summarizes factors that boost the privatization process and its main results.

Key elements such as globalization, liberalization, regulation, competition, restructuring

of privatized companies and changes in corporate governance systems are causal factors

that influence post privatization performance. Results of the privatization process may

be observed in the economy (more competitive and developed markets and

modernization of corporate governance, among others) and in the companies (higher

efficiency and performance).

[Insert Figure 1 about here]

3.- Theory and literature review

Method of privatization

The decision about which privatization method to employ is not straightforward.

Political factors, like the ideology of the government in question of market and

regulation, and economic factors, like the financial position of SOEs and the conditions

of capital markets, are involved in the process. Governments chose privatization by

public offer and established a regulation to increase the confidence of potential investors

and guarantee that the capital markets were appropriate for investing in these companies

(OECD, 1998).

The adoption of privatization programs seeks to promote the so-called popular

capitalism, that is, the democratization of capital markets through the participation of

citizens in privatization processes. The purpose of this is to decrease ownership

concentration, which can have a negative effect on firm performance (Wang and

Shailer, 2015), to strengthen a nation’s governance systems and to lead to significant

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improvements in financial systems and changes in the market regulation to create more

competitive and efficient markets. Privatization programs have forced governments to

improve effective governance systems so that the change of ownership of SOEs is

perceived as both an economic and a political success (Megginson, 2005; Tian and

Estrin, 2008). This is more complex than simply selling SOEs because it implies that

many rules and institutions have to change simultaneously. Concern about the security

issues of capital markets rose with the privatization process and the law has tried to

strengthen the protection of minority shareholders (Corrado and Zollo, 2006).

Privatizations through initial public offering (IPO) have fomented the development of

capital markets (Megginson et al., 2004). The sale of shares of SOEs have tended to be

underpriced to attract the participation of investors (Dewenter and Malatesta, 1997;

Boutchkova and Megginson, 2000; Von Eije and Megginson, 2008), who consider that

privatized firms are ‘too big to fail’ and whose regulatory framework protects them.

Larger and more profitable SOEs are more likely to be privatized through capital

markets, while governments that have less state control over the economy tend to

privatize SOEs via asset sales. Quoted companies generate an economic benefit from

the increase in liquidity that they provoke in capital markets. Moreover, the public

trading of shares establishes the possibility of takeover by outsiders and the threat of a

takeover is another management control mechanism. These market operations may

stimulate managers to achieve greater efficiency and to avoid being acquired by another

company. A major consequence of privatization is that privatized companies can be

targets of takeovers and mergers.

From these explanations, it can be deduced that the level of development of capital

markets is a key determinant of post-privatization efficiency gains (Boubakri and

Cosset, 1998). More developed markets facilitate access to private debt and equity,

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which allows a more far-reaching modernization and restructuring of companies.

Companies whose shares are traded in more sophisticated and active markets can obtain

greater performance improvements from the privatization process.

Taking all the above into account, we posit that:

H1: The method of privatization is a determinant of the performance of privatized

companies.

Developed and developing countries

The determinants of privatization performance are different in developed and

developing countries (Boubakri et al., 2005; D’Souza et al., 2005). The institutional

framework is weaker in developing countries, which provides limited investor

protection (Boubakri et al., 2008). When the law affords weak protection to

shareholders, governments are more reluctant to sell SOEs to avoid opportunist

behavior from privatized firms, potential investors do not trust privatization processes

and their effectiveness, consequently, is lower.

In developing economies, the costs by the limited competition due to technology

(economies of scale, network externalities) are internalized by the governments of these

countries and manifested during the privatization. Traditional agency problems may be

pronounced because of underdeveloped institutional infrastructures, the lack of effective

governance mechanisms, poor enforcement of property rights and underdeveloped

capital markets without effective control (Zahra et al., 2000). The evidence shows that

privatization produces better performance in countries where stock market development

and trade liberalization preceded privatization (Boubakri et al., 2005). Dharwadkar et

al. (2000) argue that principal-agent problems are linked to issues of managerial

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discretion and expropriation, which occur when large owners assume control of the firm

and deprive minority owners of the right to appropriate returns on their investments.

In developing economies, privatization is a complex economic and political process

(Frydman et al., 1999). Privatization programs are much larger than in developed

countries and these processes are part of a wider reform of political and economic

systems. Restructuring the company may lead to a successful privatization process

(Boussofiane et al., 1997; Alexandre and Charreaux, 2004; Cavaliere and Scabrosetti,

2008; Chong and Galdo, 2007; Cragg and Dyck, 1999). However, the literature shows

that the state has continued to hold shares in the vast majority of privatized companies

(Aussenegg and Jelic, 2007) and management has not been replaced in these companies.

The post-privatization ownership structure tends to be mainly concentrated in the hands

of local institutional investors, which could hinder stock-market growth and the

replacement of the management. So, the newly privatized enterprises have difficulty

carrying out the restructuring with the existing management and, as Dyck (1997)

asserts, face additional costs in purchasing managerial skills on the labor market

because of the adverse selection problem.

Consequently, our second hypothesis is:

H2: Performance of privatized companies differs in developed and developing

countries.

4.- Meta-analysis data

4.1 Selection of studies

To date, more than sixty papers have studied the relationship between privatization and

performance. However, they contain conflicting empirical results that come from study

characteristics that affect the privatization-performance relation. We only focus on the

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financial performance because the non-financial performance (e.g. quality and

effectiveness) has not been analyzed by a sufficient number of studies to warrant a

robust meta-analysis.

In order to identify relevant studies, our literature search responds to the combination of

keywords “privatization and performance” and the search was completed in October,

2014. Our meta-analysis includes articles published in academic journals in the fields of

Economics, Administrative Science, Finance and Public Administration, non-published

papers and working papers6. The databases used to discriminate the articles are the ISI

Web of Knowledge and Google Scholar.

We selected the empirical studies for inclusion in the meta-analysis on the basis of a set

of criteria. First, we included only empirical studies that reported sample sizes and r-

statistics of effects, such as correlation coefficients (Rosenthal, 1991). In the Meta-

analysis, the most widely used metric is the Pearson correlation coefficient r, which

indicates the association between ownership and performance after controlling for other

factors. The use of r as the effect size is appropriate, it is scale-free and indicates both

the direction and magnitude of the relations (Lipsey and Wilson, 2001). Second, the

paper had to contain at least one relationship between privatization and performance.

The selection yielded a total of 60 studies, dated 1989-2014, with quantitative and

comparable data on financial performance and privatization. The sample covers 48

countries and data years 1961-2010.

Table 1 shows general information on all the studies included in our sample.

[Insert Table 1 about here]

4.2 Publication status

6 Almost all the authors analysed have published their studies in journals; only a few of the articles are unpublished.

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As far as we know, our sample includes all studies that analyze the performance of

privatized companies and explain their determinants factors. Given that meta-analysis

requires as many papers as possible, we have included non-published papers and

working papers with comparable and homogeneous statistics.

4.3 Publication bias

Publication bias or file-drawer problem arises when researchers, referees or editors have

a preference for publishing results that either support a particular theory or are

statistically significant. This is particularly strong in fields that show little disagreement

concerning the correct sign of the parameter. As a consequence, estimates supporting

the theory are more likely to be published, whereas insignificant results or results

showing an effect inconsistent with the theory tend to be underrepresented in the

literature (Valickova et al., 2014).

Following Stanley and Doucouliagos (2010), we regress the estimated effect size on its

standard error. Table 2 reports the results of the funnel asymmetry test for each different

performance measure. For measures of financial performance, profitability, efficiency,

investment, leverage, output and dividends, the constant is non-significant, which

indicates no publication bias. For employment and management, the constant exhibits

publication bias. These findings suggest that conclusions based on a review of published

data could be incorrect. The coefficient 1/SE measures the privatization–performance

effect, corrected for publication selection. The statistically significant estimation of this

coefficient for profitability, efficiency, investment, output and dividends indicates that

the literature identifies, in most cases, a positive link between privatization and these

measures of performance. This relationship is clearer for efficiency and profitability,

whose p-value denotes significance at the 1% level. For leverage, this coefficient is not

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significant, which indicates a lack of relationship between this magnitude and

privatization.

[Insert Table 2 about here]

5.- Methodology

5.1 Estimating effect size

We calculate the effect size as the correlation coefficient r. For studies that do not report

r statistics, that is, studies that report Z statistics from the Wilcoxon test and Student’s t-

test, we compute r as follows (Rosenthal, 1991):

where n is the sample size.

Table 3 shows descriptive statistics of correlation coefficients for the relationship

between privatization and performance. For each study, we select the coefficients of

different measures of financial performance: profitability, employment, efficiency,

investment, leverage, output, management and dividends. We follow the criteria of

papers considered into the meta-analysis about the relationship between these measures

and the performance. Papers included in the meta-analysis use ROA, ROE and ROS as

profitability measures. Therefore, the relationship between profitability and

performance is considered positive. The efficiency is measured as the ratio sales/profit

over employees and as a efficiency index provided by the DEA model. The relationship

between efficiency and performance is positive. The number of employees is used as

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measure of employment. Its relationship with performance is considered positive. Papers

use the ratios investment over sales and over employees as Investment measures. A

positive relationship between investment and performance is indicative of improved

performance. The leverage is mainly measured as the ratio debt over assets; therefore,

the relationship with performance is considered negative. The variable real sales

(output) has a positive relationship with the performance. Papers have defined

differently the variable management (i.e. process innovation, organizational innovation,

strategic renewal). For all papers, this variable has a positive relationship with

performance. Papers included in the meta-analysis use dividends payout and the ratio

dividends over sales as dividend measures. Therefore, the relationship between this

measure and performance is considered positive. In sum, a positive (negative) sign for

profitability, employment, efficiency, investment, output, management and dividends

(leverage) is considered an improved (non-improved) performance.

[Insert Table 3 about here]

We carry out the Hunter and Schmidt (1990) meta-analysis to obtain comparable effects

and convert them to a common metric. This methodology uses statistical aggregation

techniques for cumulating correlations and correcting for various study artefacts in

order to estimate the true score correlation (ρ) between privatization and performance.

When one study offered various correlations between a performance measure and

privatization (correlations, for example, due to various measures of independent

variables), we use one correlation coefficient per study (the mean correlation

coefficient) in the meta-analysis in order to maintain independence between

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observations (Hunter and Schmidt, 1990). For each association between the

performance variable and privatization, we first calculate the weighted mean correlation

coefficient (ṝ=ΣNi ri / ΣNi), the total observed variance (S2r= ΣNi (ri- )2/ ΣNi) and the

sampling error variance (Se2 = (ri-

2)2 k/ ΣNi), where Ni is the number of observations

in each sample, r the effect size for sample i and k the number of effect sizes. Larger

sample sizes are given more weight in order to reduce sampling error, which declines as

sample size increases.

To evaluate whether the empirical correlations are homogeneous, we use two tests: (1)

the 75% rule, according to which, if 75% of the observed variance across studies can be

explained by sampling errors [(100) Se2 / Sr

2 ≥ 75], we can conclude that there is no true

variance in the studies and, thus, the association is un-moderated and homogeneous; and

(2) the Q statistic:

Q = k (Sr2)/(Se

2) = N Se2 / (1 − 2)2

where k is the number of effect sizes included in the analysis, Sr2 the total observed

variance, Se2 the sampling error variance, N the total sample size of the effect sizes and

the mean correlation coefficient. The statistical function of Q has a chi-square

distribution with k-1 degrees of freedom, and a significant Q would indicate rejection of

the null hypothesis of homogeneity.

5.2 The meta regression model

We carry out a meta-regression, taking the relation between privatization and

performance as the dependent variable and the method of privatization, the industry and

the kind of country analyzed as independent variables. For the meta-analysis, we use the

Fisher's Z transformation of correlation coefficient between privatization and

performance obtained from the studies as the dependent variable in the meta-regression.

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These values are indicative of different measures of financial performance above

mentioned: profitability, employment, efficiency, investment, leverage, output,

management and dividends. In particular, we estimate the following relationship:

Financial Performance = f (Method privatization, Developing, Industry, D70, D80, D90,

Percentage) (1)

where

- Method of privatization is a dummy variable that takes value 1 when the study refers

to companies privatized by IPO and 0 otherwise.

- Developing is a dummy variable that takes value 1 when the study analyzes companies

privatized in developing countries and 0, in developed countries.

- Industry is a control variable that takes value 1 when the study analyzes companies

from several industries and 0 otherwise.

- Percentage of privatization: dummy variable to control for any impact on performance

due to the percentage of privatized shares (full –value 1- or partial privatization).

- Decade of privatization: dummies variables that control for the decades in which the

privatization operations have been carried out. The variables D70, D80 and D90 are

introduced into the regression to indicate whether the company was privatized in the

seventies, eighties or nineties, respectively; the value is equal to one in the affirmative

case and zero otherwise. The base is D60.

Table 4 shows descriptive statistics of the independent variables.

6.- Analysis of results

We analyze the association between privatization and performance separately in Tables

5, 6 and 7.

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[Insert Table 5 about here]

In Table 5, we offer the results of the meta-regression analysis for each different

performance measure whose dependent variable is the Fisher's Z transformation of

correlation coefficient and the independent variables are method of privatization (public

offer or others) and developing (kind of country, developing or developed)7. The

variables introduced into the model as control variables are Industry, Decade of

privatization (70-90) and Percentage. The F value is high enough to conclude that the

variables with a significant t have a meaningful influence on the Zr.

The results show a positive and significant coefficient for method of privatization in the

profitability and efficiency models, which means that this variable is correlated with

performance. Therefore, the method of privatization is an explanatory factor of post-

privatization performance and companies privatized via IPO obtain a better profitability

and efficiency than those privatized via other methods. However, results indicate that

companies privatized via IPO invest less than companies privatized by private sale.

The variable developing is also significant for profitability, efficiency, investment and

output. The privatization process carried out in developing and developed countries

differs. Results indicate that profitability, efficiency, investment and output increase in

developing countries. That is, companies privatized in developing countries obtain a

better performance than those privatized in developed countries.

The results show a non-significant coefficient for D70 and Y90, which means that these

variables are not correlated with performance. The variable industry is only significant

in the output dimension, which indicates that privatizations in only one industry lead to

an improvement in output.

7 The regression has not been carried out for the variables management and dividends due the lack of degrees of freedom.

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The coefficient of the variable Y80 indicates that privatizations carried out in the

eighties are explanatory factors of post-privatization performance. The coefficient of the

variable percentage indicates that full privatization leads to better profitability, less

investment and less output. Therefore, this coefficient does not allow us to conclude that

full privatization generates a better performance.

We also carry out the Levene test to calculate the variances in ANOVA (Table 6).

Levene's test has been used to assess the homogeneity of variances for each financial

measure calculated for two groups and does not require normality. It tests the null

hypothesis that the groups’ variances are equal, that is, there is homogeneity of variance

or homoscedasticity. If the resulting p-value of Levene's test is less than the specify

significance level, we can reject the null hypothesis and conclude that there is

significant differences between groups, and so the ANOVA test conducted does no

satisfy the homogeneity of variances assumption.

[Insert Table 6 about here]

As we can see, the results of the ANOVA indicate that the profitability, efficiency and

investment of companies privatized through IPO has been different to the performance

of companies privatized using other methods. So, the method of privatization influences

performance. Differences are also significant for the variable developing; studies that

analyze developed countries obtain different results to studies that analyze developing

countries for profitability and investment.

Table 7 shows the results of the overall meta-analysis for the association between all

measures of performance and privatization.

[Insert Table 7 about here]

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As we can see, global performance is positively and significantly associated with

privatization. We cannot assume homogeneity since homogeneity tests are rejected. We

also divide the sample into the different measures of performance. The relationships

between privatization and profitability, efficiency, investment, output and dividends are

positive and significant. This means that privatization has improved these financial

measures. These results confirm the postulate of privatization theory which suggests

that a change of ownership from public to private leads to improvements in

performance. On the other hand, the association between performance and leverage is

negative and significant. This indicates that privatization is inversely related to leverage.

7.- Discussion

In spite of the multitude of studies about the relationship between change of ownership

and financial performance, the lack of consensus in the results leaves this debate open.

This is why this study is motivated by three questions: whether, how and under which

circumstances privatization benefit the performance of the firms. The conflicting

evidence on this topic limits research development in this field and the use of one type

of measure rather than another limits the study of performance. The high variance in

previous empirical findings point to the existence of contextual moderators. Following

an evidence-based research approach, we empirically synthesized research results of 60

empirical studies about the relationship of privatization and performance by carrying

out a meta-analysis. This methodology allows us to obtain a quantitative generalization,

identify the factors that influence the relationship between privatization and

performance and to understand why we find divergences between the empirical results

of papers analyzed.

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7.1.- Theoretical implications

Theoretical debates regarding effects of privatizations center on how these programs

influence performance. A prominent stream of literature proposes that private

ownership have advantages in comparison to public ownership when operating in

environments of competitive market structure (Vickers and Yarrow, 1988). Further

research points to two important effects that could explain a positive performance

impact of privatizations on firms: the method of privatization and the development of

the institutional infrastructure and governance mechanisms (Zahra et al., 2000).

The meta-regression shows that privatization through IPO seems to play an important

role for performance effects of privatizations. Specifically, the relationship between

privatization and profitability and efficiency is significantly stronger if the method is

IPO. This result is coincident with D'Souza et al. (2001), Von Eije and Megginson

(2008) and Arcas and Bachiller (2010), among others. Privatizations through IPO play

an active role in corporate governance and governments structure IPO to maximize

political and economic benefits at the expense of revenue maximization (Jones et al.,

1999) and care whether their citizens have a positive investment experience after

purchasing shares os SOEs being privatized. In sum, they take care in designing IPOs

and are concerned that the stock markets are fair and honest markets (Megginson,

2005). To this, governments have adopted new regimes of corporate and securities law,

establishing regulatory bodies to oversee privatized utilities and protect investors. The

discipline of capital markets explains why IPOs are a more effective method of

privatization than private sale and vouchers for improving firm performance. The threat

of a takeover -when the company is not efficient enough- and the risk of bankruptcy are

higher for quoted companies than for non-quoted companies. Furthermore, public

equity markets increase managerial effort and accountability due to the information

22

requirements of market regulators. However, this results should be interpreted with

caution as governments might be more proficient in selecting the more promising firms

as target of privatizations.

If we isolate the effect that privatizations have on investment the advantages from IPO

vanishes. This finding indicates that proposed benefits associated with privatizations

might be partially offset by disadvantages in the field of investments. For example, in

the telecommunications sector the investment is necessary for technological progress

and an increase in the services and quality delivered by these companies. Investment in

infrastructure is crucial for generating growth, increasing competitiveness and

improving service quality. Companies that invert retain market share and be more

profitable in the long run, especially in markets characterized by networks. Furthermore,

the investment in technology leads to an increase in service quality (Thatcher and

Pingry, 2004). The institutional environment also influences the development of

investment. If incentive regulation is appropriate, the service quality improves because

companies invest more to keep their market position and the network expands. When

competition is higher, privatized companies, motivated by a strong desire to retain

market share in a competitive industry, choose to invest more in providing end-users

with high service quality and use new techniques to differentiate themselves (Banerjee,

2003). Regulators must eliminate restrictions on entry to encourage the creation of

modern networks (Woroch, 2000) and promote competition, investment and innovation.

Taken together, our results raise doubts whether there is – on average – a positive effect

of privatization through IPO.

Although privatization is a complex process in developing countries (Frydman et al.,

1993) because of underdeveloped institutional infrastructures, the lack of effective

governance mechanisms and poor enforcement of property rights (Dharwadkar et al.,

23

2000; Zahra et al., 2000), our results show the better performance of privatized

companies in developing than in developed countries. Differences between government

controls and regulation in developing and developed countries can explain why

privatization acts differently in the two kinds of countries8. SOEs in developing

countries do not have sufficient resources because of the weak state institutions which

underfund infrastructure. These companies are more exposed to the corruption of their

governments; therefore, the transfer of ownership to private hands may bring greater

benefits in developing countries. Megginson (2005) assert that, in communist countries,

deep reforms in corporate governance and the protection of creditors and investors led

to superior economic performance, indicating the developing countries able to

implement needed legal and regulatory changes were also able to recover most rapidly

from the decline in output that all transition economies experienced after the collapse of

communism. Moreover, the differences of rates of economic growth between

developing and developed countries also explain why privatization in developing

countries is a useful tool to improve firm performance. This result is consistent with

Boubakri and Cosset (1998) and Megginson and Sutter (2006) who note strong

performance improvements for companies operating in developing countries. The

empirical evidence in developing economies shows that private ownership is better than

diffuse ownership and foreign ownership is better than domestic. The identity of new

owners is more important and the impact of post-privatization ownership on the

performance is much greater than in non-developing economies (Megginson, 2005).

When the control of SOEs is transferred to private holders, investment funds and

foreign investors, most value is created due to managers are more effectively

oversighted and disciplined by improved corporate governance regimes. The

8 We must be cautious since, in developing countries, where the regulation of infrastructure industries may be absent, the performance measures do not always show whether a reduction in availability or quality has occurred after privatisation.

24

appointment of new managers is associated with significant improvements in profit

margin and labor productivity, particularly if the managers are selected by private

owners (Claessens and Djankov, 1999).

It must be highlighted that privatization programs have been accompanied by

liberalization processes in these countries which are much larger and have not always

happened in developed countries. This indicates that governments have modernized a

nation’s corporate governance system to promote transparent markets by introducing

incentives systems in companies and creating arrangements that are conducive to

effective governance. In line with the property rights theory, our findings suggest that

privatization have replaced political managers in order to create an independent

governance system in the companies in these countries. Investors acquire shares will

restructure the company in order to adapt it to the new competitive environment and to

recover their investment and obtain a higher profitability.

7.2.- Managerial implications

Findings presented in our study indicate that privatization thought IPO has a positive

effect on the performance. Much of the positive performance effects are due to

improvements in the corporate governance system and the discipline of capital markets,

which can be value-creating especially with regard to firm growth. As D'Souza et al.

(2001) assert, the public trading of shares of privatized companies in capital markets

increases their efficiency if privatization is linked to the possibility of a takeover by

outsiders, disciplines managers and allows linking compensation to performance. So,

when shares are traded in public equity markets, managerial effort and accountability

increase. The change of ownership means that managers have to justify their actions to

new, private shareholders and are exposed to the risk of being replaced by more

efficient managers. Moreover, disclosure requirements related to the IPO improves the

25

performance of privatized firms. In quoted companies, the uncertainty is reduced due to

more information becomes available and information asymmetries decrease

(Rosenbusch et al., 2013). Our findings provide further support to the theory that

privatizations provide value for public firms. If access to substantial financial capital is

available through other means rather than the public markets, the value that

privatizations can provide likely diminishes. However, we also found that companies

privatized in capital markets do not invest more than when they are SOEs. This suggest

that the quality of delivered services may be deteriorated after privatization. Although

privatization has reduced the role of the State in the production of good and services, the

growing demand for more and better quality infrastructure services and technological

developments in sectors as the telecommunications makes necessary to establish

regulations to improve quality. Hence, economic regulators should choose standards

according to consumers’ valuation when they establish standards of quality regulation.

Organizational change is another relevant effect of the privatization process. New

management systems incorporate efficiency and customer orientation as objectives of

the firms (Clarke and Pitelis, 1993). However, this can be done without the necessity of

changing ownership. This is known as corporatization, that is, the company restructures

itself and changes its governance to imitate private firms’ management and to be more

efficient. The company incorporates incentive contracts, remuneration systems and

changes in the corporate governance to guarantee transparency, which has a positive

impact on the performance of public companies.

7.3.- Limitations and Future Research

The presence of heterogeneity in the meta-analysis indicates that other moderators

determine the performance of privatized companies, including the regulatory

framework. However, most studies included in the meta-analysis aggregate companies

26

from different countries and do not distinguish between regulated and non-regulated

companies.

The likelihood that a particular relationship is found to be significant is quite sensitive

to the characteristics of study. Thus, researchers should be cautious in generalizing from

the results of any specific analysis. In this paper, we check meta-analysis to control for

the conditional factors and to draw general conclusions about privatization. However,

our findings should be viewed within the context of the limitations endemic to the meta-

analysis methodology. As in most meta-analyses (see García-Meca and Sánchez-

Ballesta, 2010), the problem of reverse causality -privatization affecting performance or

performance affecting privatization- is not controlled for. Since the competition

determine the expected performance improvements from privatization, further research

on the roles of state Governments in competition and regulation should be considered.

Despite a large empirical literature about economic and political impact of the

privatization, the research has not yet answered how the change of ownership impacts

privatized firm’s workers. The analysis of productivity of privatized firms let us know if

employments levels remain stable or rise. However, it is difficult to predict whether a

privatization process create or destroy jobs for an entire economy. Privatization

generally causes the firm to reduce its direct employment levels, but the indirect effect

of increased industrial dynamism may cause aggregate employment to increase. More

research is needed to improve our understanding of this. Little research has analyzed

privatization’s impact on the level of development of a country. Privatization eases

national budget constraints; however, the overall distributional impact on different

groups of citizens cannot be measured. Other possible research avenues include the

analysis of the privatization of recent nationalized financial entities, especially,

European commercial banks. In the nineties, 250 commercial banks were fully or

27

partially privatized by governments of 59 countries (Megginson, 2005), either IPOs or

privately through an asset sale, because the state ownership was not working as planned.

It is expected that governments decide to privatize these entities after having been

rationalized to develop the financial system which promoted the economic growth and

to recover the current financial aids given by Europe (Pina et al., 2016).

Empirical evidence suggests that the industry seems to play an important role for

performance effects of privatizations. It is supposed that the relationship between

privatization and firm performance is significantly stronger in competitive industries

and the competition in the market can bring efficiency gains. Studies that cover the

privatizations by industry can be useful to expand the research.

Overall, our findings suggest the need for a more contextual understanding of the firm

performance phenomenon and the post-privatization benefits. The variance of the effect

sizes further cautions researchers to be sensitive to consider a comprehensive set of

positive and negative outcomes of privatizations.

8.- Conclusions

We conduct a meta-analysis to aggregate empirical evidence on the performance of

privatized companies. The findings of the meta-regression show that the method of

privatization is a determinant of the performance of privatized companies. Our results

emphasize that companies privatized through public offering obtain a better

performance than companies privatized using other methods, such as private sale or

voucher privatization. In public offerings, legal and information requirements discipline

quoted companies and obtain a bigger performance improvement. Our results do not

support the common-place assumption that privatization in developing countries does

28

not lead to improvements in financial performance. The effective liberalization

processes in these countries that were linked to the change of ownership may explain

why the performance of privatized firms improved more in developing than developed

countries.

29

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